(February 5, 2014) — Global pension fund assets grew by 9.5% in 2013, reaching a record high of almost $32 trillion, according to Towers Watson.
US pension assets grew 12% in the same time period reaching $18.9 trillion.
The consulting firm found the soar in assets—based mainly in 13 major markets—was in line with a trend that started in 2009 as markets began to recover from the financial crisis. Global assets had fallen to $20 trillion in 2008.
“The global economic recovery continued to gain momentum throughout 2013, thanks to the absence of major negative events and a stream of positive economic news,” said Chris DeMeo, head of investments for the Americas at Towers Watson. “After such a long period of financial retrenchment and uncertainty, this is extremely encouraging.”
The growth in assets contributed to improvements in pension plans’ balance sheets, the report found, with 10-year figures illustrating US funds’ growth in assets to 113% of GDP. The outlook for US pensions is positive, DeMeo said.
“Generally, US pension funds are now implementing investment strategies that are more flexible and adaptable, and contain a broader view of risk to make greater allowance for the sort of extreme economic and market volatility they have experienced during the past five years,” he said.
Global asset data for the 13 major pensions showed the US had the largest pension market with a 59% stake in total pension assets. Towers Watson also stated 10-year compound annual growth rate (CAGR) was highest in South African funds at over 14%, followed by Hong Kong at 12%. Switzerland, France, and Japan scored the lowest CAGR figures.
Data also revealed equity allocations for the largest seven markets—US, Australia, Canada, Japan, the Netherlands, Switzerland, and the UK—fell by 3 percentage points to 52% in the past 19 years. However, US and Australia pension funds kept the highest allocation to equities since 2003, reaching 57% and 54% in 2013 respectively.
Bond allocations decreased by 12 percentage points in the past 19 years, the report found, to 28%. Despite the general decline, Japanese pensions remained heavily allocated to bonds with more than half of the country’s aggregate portfolio invested in the asset class, although the figure was significantly lower than the 71% reported in 2003.
“Since our research began in 1998, there is a clear sign of reduced home bias in equities, with the average weight of domestic equities in pension fund portfolios falling from around 65% in 1998 to just over 44% in 2013,” DeMeo said. “Perhaps surprisingly, during the past 10 years, US pension funds remained the market with the highest bias to domestic equities, while Canadian funds have had the lowest allocation to domestic equities.”
Assets in alternative investments have grown in among the seven markets to 18% from 5% since 1995. Australia increased its allocations the most—from 8% to 25%—in the last decade. US pension funds recorded an allocation of 20% to alternatives in 2013.
Towers Watson also found defined contribution (DC) plan assets grew more rapidly than those of defined benefit (DB) plans—a CAGR of 9% compared to 5%.
“The recovery of US pension plans gives the government, plan sponsors, and fiduciaries important breathing room to implement nascent structures for delivering good DC-type retirement plans,” DeMeo said.
However, such growth signifies a need for continued improvements in the DC sector, DeMeo added.
“New participants’ expectations are high and immediate, but in order to meet these, there should be no lack of diligence to achieve the three most important goals for delivering effective DC plans: good governance, scale, and alignment of interests,” he said.
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